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America’s great cities are in a precarious spot.
As the workforce adapts to the pandemic-jumbled future, millions of people across the country are still not going into the office five days a week. In January, 41% of Americans were working from home for some or all of the week. Fewer people commuting into the office means fewer people spending on lunches and happy hours or stopping by retailers in downtown areas. It also means less property- and sales-tax revenue that cities depend on to fund important programs like schools and public transit. Add it all up, and the remote-work shift is costing downtowns a lot of cash. A recent analysis found that the shift to working from home cost the borough of Manhattan over $12 billion a year.
This hollowing out has in turn triggered concerns about an “office apocalypse,” the “death of downtown,” and an “urban doom loop” that will send major cities into a protracted downward spiral. Comparisons have been made to the decline of Rust Belt cities such as Detroit and Pittsburgh in the 1970s when they failed to pivot in the face of shuttering manufacturing plants. Those cities took decades to recover from the downward spiral as unemployment increased, local rents declined, poverty rates increased, and the tax base shrank.
But this bleak future is not set in stone. Cities like New York, San Francisco, and Chicago can use the short-term challenges of the remote-work shift to reinvent themselves, enhance their quality of life, and attract footloose residents. The emerging competition between regions triggered by working from home will strengthen the nation, allow cities to reinvigorate themselves for a century to come, and give Americans a larger menu of livable, affordable cities to choose from. Far from being the death knell for cities, the remote-work revolution could pave the way for a new urban boom.
Cities set themselves up for pain
In the movie “Rocky III,” the heavyweight boxing champ and people’s favorite Rocky Balboa gets complacent after years on top. Only when the brash and powerful challenger Clubber Lang unexpectedly knocks him out and takes his title does Rocky finally pursue the “Eye of the Tiger,” gaining a newfound ambition that pushes him to train for a rematch with Lang.
Like Rocky, superstar cities have been overconfident — about their ability to attract residents. Sure, they attracted their fair share of talented people and ambitious businesses over the past few decades, but that was despite flagging services. Places like New York and San Francisco did not innovate how they kept streets safe or how they provided public education or transportation. And they didn’t make it easy or cheap to live there either.
Before 2020, home prices in these cities soared as they built very little housing. Zoning regulations driven by “not in my backyard” politicians and residents limited developers’ ability to build housing and absorb soaring demand. The real-estate platform Zillow’s home-price index suggests prices for a home in San Francisco grew by 106% from February 2010 to February 2020, from $631,000 to $1.3 million, while the national index increased by only 50%, from $157,000 to $234,000. The same housing issues have also hit New York. According to the data-compilation company RentData.org, New York rents have increased by 103% for one-bedrooms and by 81% for two-bedrooms since 2010.
By not tackling this housing problem, these cities ended up catering to elite residents and failing the middle class, depriving them of the quality of services and housing that their families needed to thrive.
The bill is coming due
As more people shift to remote work and shop around for a place to live, the bill for decades of underinvestment and poor management in America’s large cities has come due. Workers are voting with their feet and moving farther from the expensive urban core. And early projections suggest these cities will face major budget problems. The comptroller for the city of New York estimated that the city’s non-property-tax revenue would decline by 7% and that the overall deficit would hit $2.9 billion in 2023. In San Francisco, tax revenue is projected to drop by as much as a billion dollars over the next six years.
The exodus of workers is also leading to a dire outlook for a cornerstone of these downtowns: their office towers. An academic paper titled “Work From Home and the Office Real Estate Apocalypse” drew a lot of attention in late 2022. The authors found that the value of New York City’s commercial real estate declined by 44.8% between December 2019 and December 2020. And while they said the value of the offices bounced back some as pandemic restrictions eased, they projected that such depressed market conditions could persist throughout this decade. Data from the real-estate firm CoStar suggests similarly worrying trends for New York City. From 1996 to 2022, the average vacancy rate for offices was roughly 9%. Today it’s roughly 16%, the highest level in the past 26 years.
This office downturn isn’t limited to the Big Apple. The total square footage leased — a measure of how many businesses are renting out office space — across 14 major US real-estate markets fell by 60% between 2019 and early 2022. While vacancy rates are up, sales of office buildings are down. In a typical year, roughly $11 billion worth of office space trades hands, but in 2022 this collapsed to $3.5 billion. Sales volume has declined by 83% from its peak in 2016.
The empty office towers are already setting off alarm bells for leaders in major metro areas. New York City’s mayor, Eric Adams, has been vocal about his desire to get more people in offices, arguing that workers shouldn’t “stay home in your pajamas all day!” Adams has expressed concerns that permanent declines in the city’s public-transit use, retail vibrancy, and tax-base revenue would undermine his administration’s ability to provide basic public services. “I need the accountant in the office so that they can go to the local restaurant, so that we can make sure that everyone is employed,” he told reporters last March.
Bruce Harrell, the mayor of Seattle, expressed a similar sentiment but also acknowledged that people’s working patterns have shifted permanently. “I’m trying to encourage employers to get folks back, develop the energy and synergy that we need,” he said in October. “But the fact of the matter is there will never be the good ol’ days where everyone’s downtown working.”
The chance of a new dawn
Despite the doom and gloom over these cities’ prospects, the emerging day of reckoning for cities such as New York, San Francisco, and Seattle can also be an opportunity. Nick Bloom, a leading economist who surveys businesses and workers, says young people still want to live and work in vibrant city centers. “If you look at 20- to 29-year-olds, they have a very strong preference for having at least two, three days a week on-site,” Bloom recently said on a podcast. If cities offer these young people greater opportunities to learn, network with employers, and enjoy cultural events, they can still thrive.
In order to bring in these new residents, cities will have to shift some of their priorities. Major metros will have to experiment with new ways to reduce crime, provide better education, and deliver other services for residents. Property owners in these cities, threatened with a massive asset loss if their city becomes a ghost town, will also have to nudge leaders to adapt to the new realities.
If the traditional accounting and law firms need less space because of new work-from-home policies, then big cities will have to entice a new cohort of younger startups looking for a foothold in a productive, exciting place with incentives like local college partnerships, innovation districts, and dedicated government liaisons.
Major cities can also help ease the pain of remote work and attract new residents by making housing more affordable. After years of delays and rising prices, San Francisco is using the pandemic’s wake-up call to push for more building: Mayor London Breed’s office recently released a plan to build 82,000 units in the next eight years. One new way to facilitate this growth would be to convert commercial real estate into housing. Of course, commercial buildings differ in their potential to be residential apartments, but the most successful cities will be flexible enough to innovate. In New York, Adams is trying to streamline zoning and regulatory codes to reduce the costs of such conversions. Los Angeles is pursuing “adaptive reuse,” a fancy way of saying it’s trying to turn empty commercial buildings into apartments. Cities can also experiment with smaller quality-of-life improvements — for instance, after years of stalling, New York is testing a containerized trash-disposal system to clean up the city’s sidewalks.
As New York learned in the 1970s, fears about crime can dissuade both tourists and new residents from coming to the city. Research coauthored by Steven Levitt of “Freakonomics” found that increases in violent and property crimes were correlated with city residents migrating to the suburbs. Using a wide array of tools — from better infrastructure and jobs programs to smart technology and effective policing — mayors who can make streets safe will have a better shot at attracting and retaining the footloose.
Considerable risks do lurk here. For cities with older decaying commercial buildings, the cost of residential conversion may be very high. Additionally, sweeping changes to zoning or property-use regulations take a long time to work out with local politicians and other community groups, which make most urban plans extremely difficult to implement. The competition to attract and retain talent will be intense, and some cities will fail to come out on top.
But overall the move to remote work can help these places become stronger. It may not always be easy, but by catering to people who truly want to live there with improved affordability and quality of life, America’s superstar cities can usher in a new urban boom.
All is not lost
There’s little doubt that superstar cities like New York and San Francisco have serious problems on their hands. But an “office apocalypse” or the “death” of their downtowns is not a fait accompli.
The cities facing troubles in 2023 have several advantages that the rusted-out manufacturing centers like Detroit and Akron, Ohio, did not have in the 1970s. They attract domestic and international tourists because of their famous sights and cultural attractions. The cities’ populations are generally highly educated, and local top-notch universities still attract new cohorts of young people seeking to make their name, learn, and network. And these cities aren’t reliant on a single industry, making them more resilient to abrupt changes.
In the medium term, the work-from-home shift will make San Francisco, New York, and others stronger cities because those who really want to live there will do so. These cities will become more affordable and younger, and they’ll have more spunk. Americans everywhere adapted to the challenge of COVID-19 by working from home. Now American cities are being forced to adapt to the work-from-home revolution.
Matthew E. Kahn is the Provost Professor of Economics at the University of Southern California and the author of “Going Remote: How the Flexible Work Economy Can Improve Our Lives and Our Cities.“
Christopher Okada is the CEO of Okada & Company, a full-service commercial real estate brokerage and investment company in New York City.
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